A Sibling's Story: Thanksgiving, 2012

by Alex Nadworny

It was the first Thanksgiving in a long time where it was just the five of us: Ben, me, Dad, Mom and James, around the table. We gave thanks for all we had and the feasting began. We ate and talked and laughed until we were as stuffed as Thanksgiving turkeys ourselves. We settled into post-dinner conversation and everyone was relaxed and in a great mood, when I heard myself say to my parents, “Where will James live when you are gone?”

Immediately Ben replied, “He’s living with me.”

To which I said, “No, with me.”

To which my Dad said, “No way he’s living with either of you!”

This question had been on my mind. I loved James and would do anything for him, but I didn’t know exactly what being his caregiver would entail and how it would impact my life. I have never been concerned about the planning for my brother; this was a given as my Dad is a professional financial planner and my Mom is an advocate and support group leader. But no one had ever asked me what I wanted for James.

I knew my parents were handling things from a big picture perspective, like building a home for James, but I wanted to know more about what was involved with supporting his day-to-day life. My Mom kept a detailed schedule of James’ activities but there was something missing: the many things James required, big and small, that she and my Dad did every day.

Our family always talked about everything and I felt comfortable asking my parents anything; there were never any communication barriers. In this case, it was harder for my parents to hear this question than it was for me to ask it. While they had a plan all mapped out in their minds, they had avoided talking with Ben and me about our future roles in James’ life. Like many parents, they assumed that caring for James would place a burden upon us and they were not ready to have that conversation. I felt differently; I wanted to know what the plan was and to be empowered to shape my role in James’ life.

In many families, adult children who have a sibling with special needs have their own lives and for varying reasons, really don’t want to be involved in a hands-on manner; they may live a distance away, have family obligations of their own and/or a demanding career. Still, talking about the who, what, and where of the future support plans for their sibling is an essential conversation to have. A sibling’s expectation does not need to be that they will be a caregiver or have to change their life. It is a wonderful role to be just a brother or sister.

The truth is that while every family is different, this conversation always needs to happen. This holiday season, if the atmosphere is right, and you know what you want to say, respectfully start talking!

The Special Needs Financial Planning Team

If you have a Home Equity Line of Credit (HELOC), it may have become a whole lot more expensive recently.

Here’s why:

Your tax deduction may have been eliminated. The Tax Cuts and Jobs Act of 2017 eliminates the deduction for interest paid on home equity loans and lines of credit unless they are used to buy, build or substantially improve the taxpayer’s home securing the loan. This suspension begins in 2018 and is slated to phase out in 2026.

Case Example: To provide the down payment for a cottage at the beach, Charlie took a $100,000 HELOC in 2017 at a rate of 4% on his primary residence. Charlie is in the 30% tax bracket, so while his HELOC interest totaled $4000, the real after-tax cost was $2,800. The way Charlie looked at it, his HELOC rate was really 2.8% rather than 4%. Enter the new tax law of 2017. Beginning in 2018, purchasing a second home is no longer considered a qualified use of a HELOC for tax purposes. This means the real cost of Charlie’s HELOC is now the same as the rate he is being charged by the bank. And there’s more…

Short-term interest rates have been rising. Potentially even more impactful than losing the interest deduction on your HELOC, are rising short-term interest rates. Short-term interest rates are highly responsive to the actions of the Federal Reserve raising the fed funds rate. The Federal Reserve has had a policy of small, but steady, rate increases, having raised rates six out of the last seven quarters! Changes have occurred so quickly, you may not even be aware of how much you are paying.HELOCs are variable rate loans and are many times pegged to the prime rate. The prime rate is the rate banks charge their most credit-worthy customers and is largely determined by the fed funds rate. (Investopedia)The table below shows the prime rate for each year 2015-2018. (JP Morgan Chase)

Date

Prime Rate

12/17/2015

3.50%

12/15/2016

3.75%

12/14/2017

4.50%

9/27/2018

5.25%

As you can see from the chart, the prime rate has increased 1.75%, or 175 basis points over the past 3 years, with another hike probable by the end of 2018.

Case Example: Let’s catch up with Charlie. He cannot deduct the interest on his HELOC in 2018 and, to make matters worse, as short-term rates have climbed, the rate on his HELOC loan has increased. By October 1, 2018, Charlie’s interest rate has risen to 5.25%. With the interest no longer tax deductible, the actual annual cost of his HELOC is now about $5,000, rather than his prior after-tax cost of $2,800!

What are your options?

Match your needs with the proper financing tool.In discussions around borrowing money, we employ a fundamental standard of finance called the matching principle. The matching principle states that short term needs should be financed with short term debt and longer term needs with long term debt. Although the draw period of a HELOC is typically 10 years, because it is a variable rate loan, it should be considered as a short-term financing tool. This is especially important in a rising interest rate environment.Many disciplined savers find it useful to view their finances in distinct buckets or categories for the purpose of implementing their budgeting or savings strategies. An example of this could be setting aside money to buy a new car or saving a specific amount each pay period toward a vacation. In some cases, individuals may extend this strategy to employ funds from a HELOC to help meet other obligations or make a specific purchase rather than taking the money from their savings. In the past, when rates were consistently low and the interest was tax deductible, this approach may not have been costly. However, in today’s interest rate environment, equity loans are no longer “cheap money”. It may be wise to consider paying down a HELOC loan.

Utilize the cash in your “rainy day” or emergency fund.The good news about short term interest rates rising is that both savings accounts and money market funds are paying a bit more interest. Currently, the top money market funds are paying about 2% interest while the HELOC rate is 5%. (source: Bankrate.com). If it is many years before your HELOC draw expires, this line of credit will be available to you and can satisfy your cash needs should an emergency arise. It may make sense to use the savings in your “rainy day” or emergency fund to pay off your HELOC. This option may make even more sense now with interest paid on the HELOC not tax deductible in many cases. Note that you are paying down the balance of the HELOC while leaving the line of credit open and available to you. While this strategy may sound contrary to the sound advice of always having an emergency reserve in the bank, remember, you have access to the equity line by simply writing a check. Why would you have savings in a money market account earning approximately 2% while you are paying 5% on the HELOC?

Consider refinancing your mortgage. If you have both a HELOC and an existing mortgage and a near-term payoff is not realistic or practical, consider refinancing as an option. In general, while HELOCs are tied to short term rates, such as the prime rate, mortgages are tied to longer term rates, specifically the 10-year Treasury Note. The table below depicts the 10-year Treasury rates (WSJ.com Market Data) and the average U.S. 30-year fixed mortgage rate (FRED Economic Data) along with the prime rate over a 3 year time spectrum. This table serves to illustrate how quickly HELOC rates have increased in comparison to mortgage rates.

Date

Prime Rate (HELOC)

10 Year Treasury

US 30 year

Mortgage

12/17/2015

3.50%

2.24%

3.97%

12/15/2016

3.75%

2.60%

4.16%

12/14/2017

4.50%

2.35%

3.93%

9/27/2018

5.25%

3.06%

4.72%

As you can see from the data above, HELOC’s have gone up 1.75%, while 30-year loan averages have increased by about .75%. Remarkably, borrowing for the short term (@5.25%) is currently more expensive than borrowing for the long term (@4.72%)!The yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates. (Source: Investopedia). We currently have a flattening yield curve with rates on the short end of the maturity spectrum reacting more quickly to increases in the fed funds rate than rates on the longer end. You may want to consider locking in a mortgage at this time to satisfy the balance of the HELOC. Another wrinkle to be aware of, the Tax and Jobs Act of 2017 has lowered the cap on the mortgage interest deduction. The deduction of interest on a new mortgage for a first or second home is now capped at $750,000 (previously $1,000,000).If the mortgage option is out of reach or impractical for you, another option is to talk with your bank and ask if you can convert the HELOC to a home equity loan. While a home equity loan will have a higher rate of interest than a mortgage, due to it being second in line or subordinated to the primary mortgage, it has the benefit of having a fixed rate of interest. Every situation is different; you may be fortunate and have an extremely low mortgage rate and refinancing may not be appropriate. We are here to help you walk through the analysis to help determine what actions would be most appropriate for you.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. Examples are hypothetical for illustrative purposes only. Individual results will vary. Shepherd Financial Partners and LPL Financial do not offer mortgage services.

The Acting Inspector General of Social Security, Gale Stallworth Stone, is warning citizens about an ongoing caller-ID “spoofing” scheme misusing the Social Security Administration’s (SSA) national customer service phone number. SSA has received numerous reports of questionable phone calls displaying SSA’s 1-800 number on a caller-ID screen.

The reports indicate the calls display 1-800-772-1213, SSA’s national customer service number, as the incoming number on caller ID. People who have accepted the calls said the caller identifies as an SSA employee. In some cases, the caller states that SSA does not have all of the person’s personal information, such as their Social Security number (SSN), on file. Other callers claim SSA needs additional information so the agency can increase the person’s benefit payment, or that SSA will terminate the person’s benefits if they do not confirm their information.

SSA employees do contact citizens by phone for customer-service purposes, and in some situations, an SSA employee may request the citizen confirm personal information over the phone. However, SSA employees will never threaten you for information or promise a Social Security benefit or approval or increase in exchange for information.” See the full advisory at the OIG website.

The Tax Cut and Jobs Act (TCJA) of 2017 is the largest piece of tax reform legislation that Congress has passed in over thirty years. The total impact will vary dramatically for each taxpayer.

Timing of the TCJA

With the notable exception of medical expenses (see below), TCJA begins to apply to individuals beginning January 1, 2018 and will sunset (go back to the previous law) on December 31, 2025.

Summarized below are some key changes that may impact you and could be specifically relevant to individuals with disabilities.

To read a summary of the impactful changes to all individuals, including people with disabilities, click here.

The Blind/Elderly Deduction retained.

Although personal exemptions have been done away with, individuals age 65 and over or blind, can claim an additional $1550 deduction if they file as single or head of household. Married couples filing jointly can claim $1250 if one meets the above requirement and $2500 if both do so.

The Medical Expenses Deduction has increased.

People may deduct qualifying medical expenses exceeding 7.5% (was 10% previously) of their adjusted gross income (AGI) for both 2017 and 2018. This increase applies retroactively to medical expenses incurred in 2017 and claimed on the 2017 tax return.

Repeal of Overall Limitation on Itemized Deductions.

The Act suspends the overall limitation on itemized deductions. Prior to tax year 2018, most allowable itemized deductions (other than medical, investment interest, casualty/theft or gambling losses) were limited for many upper income taxpayers.

The Child Tax Credit has doubled.

The child tax credit amount is now $2000 (from $1000) per qualifying child (the child must have a SSN) under age 17.

The TCJA widened the pool of eligible applicants. This credit will begin to phase out at AGI levels in excess of $400,000 for joint filers (was $110,000) and $200,000 for all other filers.

The refundable portion of the credit has increased by 40% allowing up $1,400 of the $2,000 credit to be refundable credit.

A New Family Credit .

Taxpayers are now able to take a $500 nonrefundable credit for qualifying relatives and for qualifying children who are not eligible for the $2,000 credit because they are age 17 and over. These qualifying children include those ages 17 and 18(or up through age 23 for full-time students and any age for adult children with a disability.)

Changes to the “Kiddie Tax”.

What is the kiddie tax? If a child (under the age of 19 or under the age of 24 and attending school full-time) has unearned income from net investment income such as; dividends, interest or capital gains, or income from a trust or UTMA, they must pay tax on that income in excess of $2,100.

In the past, earnings subject to the “kiddie tax” were taxed at the higher of the child or parents’ tax rates. Under the tax reform, beginning in 2018, the parents’ tax rate no longer matter rather a child’s net investment earnings in excess of $2,100 will be subject to estate and trust rates, marginal rates that quickly move upward.

The Exemption for Qualified Disability Trust (QDisT) or Third Party Special Needs Trust is Retained.

A QDisT may retain $4150- the amount of the exemption- tax-free each year. This is in contrast to a first party or grantor trust, which will have the income from the trust counted as part of the donor’s personal income.

Note: Many readers will have established third party special needs trusts that are not funded until their death. The following only applies if the trust is funded.

What is a QDisT?

A QDisT is a non-grantor trust that meets certain rules and functions similar to a “complex” trust, meaning it does not require all of the income to be distributed to the beneficiary each year.

A qualified disability trust is a third party special needs trust. This means the funds within are not created or owned by the beneficiary and the QDisT will file its own tax return.

Beneficiaries must have a qualified disability as defined by the Social Security Administration and supported by proper documentation.

The trust must be established before the beneficiary is age 65, however, the QDisT may claim the same treatment after beneficiary turns 65.

The kiddie tax rules do not apply to QDisT, unlike other trusts and individual tax filings.

QDisT Case Example :

Robin is Trustee of Julia’s QDisT. Julia is 15 years old. The QDisT has an investment portfolio worth $500,000, which generates $30,000 in taxable income. During the tax year, Robin paid for a vacation for Julia that cost $5,000 and for educational expenses of $5,000 for tutoring and related expenses. Robin charged a reasonable fee of $2,500 for the year.

Robin causes a Form 1041 to be filed for the trust, reporting the $30,000 income. As discussed above, there will be a $4,150 exemption used. Robin’s $2,500 in fees will be deducted for administrative expenses, and Julia’s $10,000 in distributions will be deducted. The trust will have a taxable income of $13,350. The QDisT will send a K-1 to Julia showing her distribution, and she will be responsible for reporting that $10,000 distribution on her personal Form 1040 tax return.

As the income is received as a distribution from a QDisT, the $10,000 will not be subject to the kiddie tax and Julia will be able to apply the new level of standard deduction, $12,000, toward her income.

Changes to the ABLE Law

The role of ABLE Accounts was expanded by the TCJA. We have provided a summary here based upon information from the ABLE National Resource Center.

Changes include:

Increased annual contribution limit- now $15,000.

ABLE to Work – this provision allows an ABLE account beneficiary who works and earns income to contribute funds above the $15,000 annual limit.

The additional contribution may be up to the lesser of: the account beneficiary's earned income or the federal poverty line, which for 2018 is $12,060. This means it is possible to contribute up to $27,060 to an ABLE account in one year.

Two additional elements of the law to be aware of when considering eligibility for the additional contribution:

(1) the ABLE beneficiary may not be a participant in their employer-based retirement fund, including if an employer makes contributions to the fund on their behalf.

(2) the Beneficiary's employment earnings deposited in an ABLE account are still counted in terms of Substantial Gainful Activity (SGA) or earned income, and will be taken into consideration when determining eligibility for certain public benefits.

ABLE to Work Case Example:

Sheila, an ABLE owner has a job and makes $13,000. She does not participate in her employer's retirement plan. Although her parents have put $15,000 into her ABLE account in 2018, Sheila can contribute an additional $12,060 of HER OWN MONEY into her ABLE account.

Ability to Rollover funds from a 529 College Savings account to an ABLE -529A-account.

Savers Credit – Provides access to the Retirement Savings Contribution Credit. An ABLE owner contributing to their own account, and meeting the following eligibility requirements, may claim this credit toward taxes owed with the maximum value reducing the taxes owed to zero. The ABLE owner must be:

Age 18 or older

Not a full time student

Not claimed as a dependent on another person's return

Details about the Saver's Credit:

Maximum credit is $2000 for an individual and $4000 for a couple

Percent of your contribution allowed to take is reduced as your AGI (Adjusted Gross Income) increases

Saver's Credit Case Example:

You are an ABLE owner working and making $20,000. You have put $2000 into your ABLE account this year. You can take a credit of 50% of your contribution, equal to $1000 in this case, to reduce your tax liability. If possible, you can use this $1000 to contribute further to your savings.

As always, please contact us for more information about how the new tax law may impact your own personal planning.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Examples are hypothetical for illustrative purposes only. Individual results will vary.

Please join us as we welcome Kathleen Kelly of the Massachusetts Rehabilitation Commission presenting on the topic of public benefits for working individuals with disabilities. Discussion will include: